Educational Articles

Dow 30 Earnings: Alcoa Inc. - Fourth Quarter 2010

Frederick L. Harris, III
| January 11, 2011

Alcoa (AA - Free Alcoa Stock Report), a global leader in aluminum production, has concluded 2010 on an upbeat note, as earnings per share were $0.24, compared with our estimate of $0.15 and the year-earlier loss of $0.27. This result can be attributed, in part, to better pricing for aluminum, indicating, it seems, that economies around the world are on the slow road to recovery. The company also benefited from ongoing restructuring initiatives that have included divestitures of noncore assets. But a weaker U.S. dollar and escalating costs for raw materials and energy somewhat offset the aforementioned catalysts. Even so, share net for the year, as a whole, rose to $0.24, which marked a major turnaround from the 2009 deficit of $1.06. Notably, Alcoa generated free cash flow of $1.2 billion in 2010, which was its highest level since 2003.

We believe that the momentum will continue this year. In fact, a number of the company's end markets have been strengthening, such as aerospace and automotive. Ongoing streamlining efforts (which would include a sharp reduction in capital expenditures) should also help. Unfortunately, it appears that costs for raw materials and energy will remain high. Despite these potential headwinds, we expect share net to climb to $0.90 in 2011.

Meanwhile, the company's prospects out to mid-decade look decent, in our view. Indeed, China, Brazil, India, and other developing countries are experiencing an expansion of the middle class. As a result, demand for such things as housing and transportation may well rise at a steady clip going forward. Alcoa stands to be helped nicely by this trend, given that aluminum is strong, lightweight, and has environmental benefits. Moreover, business combinations (made possible by adequate finances) ought to aid the company's expansion. Lastly, profits should be bolstered by additional improvements in operating efficiencies.

At the stock's current quotation, long-term recovery possibilities are worthwhile. Still, given these shares' vulnerability to fluctuations in aluminum prices, only risk-tolerant investors should take a look.

About The Company: Alcoa Inc., a Pennsylvania corporation, is a global leader in the production and management of primary aluminum, fabricated aluminum, and alumina combined. It supplies the aerospace, automotive, building and construction, commercial transportation, and industrial markets. It has more than 300 operating and sales locations in over 35 countries. Sales of aluminum and alumina account for more than three-fourths of Alcoa’s total revenues. It also produces nonaluminum products, such as precision castings and fasteners for the aerospace and industrial markets. Alcoa’s operations consist of four worldwide reportable segments: Alumina, Primary Metals, Flat-Rolled Products, and Engineered Products and Solutions.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.